ALLIANZGI INSTITUTIONAL MULTI-SERIES TRUST. STATEMENT OF ADDITIONAL INFORMATION February 1, 2018 (as revised July 1, 2018)

Transcription

1 ALLIANZGI INSTITUTIONAL MULTI-SERIES TRUST STATEMENT OF ADDITIONAL INFORMATION February 1, 2018 (as revised July 1, 2018) AllianzGI Advanced Core Bond Portfolio AllianzGI Best Styles Global Managed Volatility Portfolio AllianzGI Global Small-Cap Opportunities Portfolio

2 ALLIANZGI INSTITUTIONAL MULTI-SERIES TRUST STATEMENT OF ADDITIONAL INFORMATION February 1, 2018 (as revised July 1, 2018) This Statement of Additional Information is not a prospectus, and should be read in conjunction with the private placement memoranda (the PPMs ) of the series of AllianzGI Institutional Multi-Series Trust (the Trust ), as supplemented from time to time. Through the PPMs, the Trust offers three series of shares (each a Portfolio ): AllianzGI Advanced Core Bond Portfolio, AllianzGI Best Styles Global Managed Volatility Portfolio and AllianzGI Global Small-Cap Opportunities Portfolio. The annual report for the series of the Trust as of September 30, 2017, including notes thereto, and the report of PricewaterhouseCoopers LLP thereon, are incorporated by reference from the Trust s September 30, 2017 Annual Report. The Trust s September 30, 2017 Annual Report was filed electronically with the Securities and Exchange Commission ( SEC ) on December 1, 2017 (Accession No ). A copy of the PPMs and the Annual and Semi-Annual Reports corresponding to such PPMs may be obtained free of charge at the addresses and telephone number(s) listed below. To obtain a Portfolio s PPM, Annual and Semi-Annual Reports, and Statement of Additional Information, please contact: Allianz Global Investors Distributors LLC 1633 Broadway New York, NY Telephone:

3 TABLE OF CONTENTS THE TRUST 6 INVESTMENT OBJECTIVES AND POLICIES 6 BORROWING 6 INTERFUND LENDING 8 PREFERRED STOCK 8 SECURITIES LOANS 9 CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES 10 NON-U.S. SECURITIES 12 FOREIGN CURRENCIES AND RELATED TRANSACTIONS 15 COMMODITIES 17 DERIVATIVE INSTRUMENTS 17 SHORT SALES 29 WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS 30 RIGHTS AND WARRANTS TO PURCHASE SECURITIES 31 REPURCHASE AGREEMENTS 32 OTHER INVESTMENT COMPANIES 32 REGULATION S SECURITIES 33 ILLIQUID SECURITIES 33 CORPORATE DEBT SECURITIES 34 U.S. GOVERNMENT SECURITIES 34 HIGH YIELD SECURITIES ( JUNK BONDS ) 36 INFLATION-INDEXED BONDS 36 DELAYED FUNDING LOANS AND REVOLVING CREDIT FACILITIES 37 EVENT-LINKED BONDS 37 CREDIT-LINKED TRUST CERTIFICATIONS 38 GUARANTEED INVESTMENT CONTRACTS (FUNDING AGREEMENTS) 38 LOAN PARTICIPATIONS AND ASSIGNMENTS 38 PARTICIPATION ON CREDITORS COMMITTEES 39 BANK OBLIGATIONS 39 SENIOR AND OTHER BANK LOANS 39 COMMERCIAL PAPER 40 MONEY MARKET INSTRUMENTS 40 VARIABLE AND FLOATING RATE SECURITIES 41 ZERO COUPON BONDS, STEP COUPON BONDS AND PAYMENT-IN-KIND SECURITIES 41 DEBTOR-IN-POSSESION FINANCINGS 42 MUNICIPAL SECURITIES 42 MORTGAGE-RELATED AND ASSET-BACKED SECURITIES 44 REAL ESTATE SECURITIES AND RELATED DERIVATIVES 50 EXCHANGE-TRADED NOTES 51 HYBRID INSTRUMENTS 51 POTENTIAL IMPACT OF LARGE REDEMPTIONS AND PURCHASES OF PORTFOLIO SHARES 52 CYBER SECURITY RISK 52 CONTINTENT VALUE RIGHTS 53 INVESTMENT RESTRICTIONS 53 INVESTMENT OBJECTIVES 53 FUNDAMENTAL INVESTMENT RESTRICTIONS 53 POLICIES RELATING TO RULE 35D-1 UNDER THE 1940 ACT 54 OTHER INFORMATION REGARDING INVESTMENT RESTRICTIONS AND POLICIES 54 MANAGEMENT OF THE TRUST 55 TRUSTEES AND OFFICERS 55 COMMITTEES OF THE BOARD OF TRUSTEES 62 SECURITIES OWNERSHIP 63 TRUSTEES COMPENSATION 64 PROXY VOTING POLICIES 65 3

4 INVESTMENT MANAGER 66 PORTFOLIO MANAGER COMPENSATION, OTHER ACCOUNTS MANAGED, CONFLICTS OF INTEREST AND CORPORATE CULTURE 68 CODES OF ETHICS 71 DISTRIBUTION OF TRUST SHARES 72 DISTRIBUTOR 72 PURCHASES AND REDEMPTIONS 71 REDEMPTION FEES 73 ADDITIONAL INFORMATION ABOUT PURCHASES AND REDEMPTIONS OF PORTFOLIO SHARES 73 DISCLOSURE OF PORTFOLIO HOLDINGS 76 PORTFOLIO TRANSACTIONS AND BROKERAGE 77 INVESTMENT DECISIONS AND PORTFOLIO TRANSACTIONS 77 BROKERAGE AND RESEARCH SERVICES 78 REGULAR BROKER-DEALERS 80 PORTFOLIO TURNOVER 80 NET ASSET VALUE 81 TAXATION 82 TAXATION OF THE PORTFOLIOS 82 PORTFOLIO DISTRIBUTIONS 83 LIMITATION ON DEDUCTIBILITY OF PORTFOLIO EXPENSES 85 SALE OR REDEMPTION OF SHARES 85 OPTIONS, FUTURES, FORWARD CONTRACTS, SWAP AGREEMENTS, HEDGES, STRADDLES AND OTHER TRANSACTIONS 86 SHORT SALES 87 ORIGINAL ISSUE DISCOUNT, PAY-IN-KIND SECURITIES, MARKET DISCOUNT AND COMMODITY- LINKED NOTES 87 SECURITIES PURCHASED AT A PREMIUM 88 HIGHER-RISK SECURITIES 88 ISSUER DEDUCTIBILITY OF INTEREST 88 CERTAIN INVESTMENTS IN REITS AND MORTGAGE -RELATED SECURITIES 89 INVESTMENTS IN MASTER LIMITED PARTNERSHIPS 89 TAX-EXEMPT SHAREHOLDERS 89 PASSIVE FOREIGN INVESTMENT COMPANIES 90 FOREIGN CURRENCY TRANSACTIONS 90 FOREIGN TAXATION 90 NON-U.S. SHAREHOLDERS 90 BACKUP WITHHOLDING 92 TAX SHELTER REPORTING REGULATIONS 92 SHAREHOLDER REPORTING OBLIGATIONS WITH RESPECT TO FOREIGN BANK AND FINANCIAL ACCOUNTS 91 OTHER REPORTING AND WITHHOLDING REQUIREMENTS 92 SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS 93 OTHER INFORMATION 93 CAPITALIZATION 93 ADDITIONAL PERFORMANCE INFORMATION 93 CALCULATION OF TOTAL RETURN 94 VOTING RIGHTS 94 CERTAIN OWNERSHIP OF TRUST SHARES 94 CUSTODIAN 94 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 94 TRANSFER AGENT 94 LEGAL COUNSEL 94 REGISTRATION STATEMENT 94 4

5 FORWARD-LOOKING STATEMENTS 95 FINANCIAL STATEMENTS 96 APPENDIX A Description of Securities Ratings A-1 APPENDIX B Certain Ownership of Trust Shares B-1 APPENDIX C Proxy Voting Policies C-1 APPENDIX D Procedures for Shareholders to Submit Nominee Candidates D-1 5

6 THE TRUST AllianzGI Institutional Multi-Series Trust (the Trust ) is an open-end management investment company ( mutual fund ) that currently consists of three separate investment series, all of which are offered in this Statement of Additional Information. The AllianzGI Best Styles Global Managed Volatility Portfolio and the AllianzGI Global Small-Cap Opportunities Portfolio are diversified within the meaning of the Investment Company Act of 1940, as amended (the 1940 Act ). The AllianzGI Advanced Core Bond Portfolio is non-diversified within the meaning of the 1940 Act. The Trust was organized as a Massachusetts business trust on June 3, This Statement of Additional Information relates to the private placement memoranda for each of the AllianzGI Advanced Core Bond Portfolio, the AllianzGI Best Styles Global Managed Volatility Portfolio, and the AllianzGI Global Small-Cap Opportunities Portfolio (each a PPM and, together, the PPMs ). The series listed in the preceding sentences are sometimes referred to collectively as the Portfolios. The Trust may from time to time create additional series offered through new, revised or supplemented PPMs and statements of additional information. On June 3, 2015, the Board of Trustees of the Trust approved a change in the fiscal year end of each Portfolio of the Trust. Effective as of September 30, 2015, each Portfolio s fiscal year end changed from November 30 to September 30. On September 28, 2015, the AllianzGI U.S. Unconstrained Equity Portfolio was liquidated and dissolved. On October 1, 2016, Allianz Global Investors Fund Management LLC ( Allianz Global Fund Management ) was merged into Allianz Global Investors U.S. LLC ( AllianzGI U.S. or the Manager ). On July 31, 2017, the AllianzGI Discovery U.S. Portfolio was liquidated and dissolved. AllianzGI U.S. is the investment manager of each Portfolio. AllianzGI U.S. is a wholly-owned indirect subsidiary of Allianz Asset Management of America L.P. ( AAMA ). INVESTMENT OBJECTIVES AND POLICIES In addition to the principal investment strategies and the principal risks of the Portfolios described in the PPMs, each Portfolio may employ other investment practices and may be subject to additional risks, which are described below. Because the following is a combined description of investment strategies and risks for all the Portfolios, certain strategies and/or risks described below may not apply to particular Portfolios. Unless a strategy or policy described below is specifically prohibited by the investment restrictions listed in the PPMs, under Investment Restrictions in this Statement of Additional Information, or by applicable law, each Portfolio may engage in each of the practices described below. However, no Portfolio is required to engage in any particular transaction or purchase any particular type of securities or investment even if to do so might benefit the Portfolio. Unless otherwise stated herein, all investment policies of the Portfolios may be changed by the Board of Trustees without shareholder approval or notice. In addition, each Portfolio may be subject to restriction on its ability to utilize certain investments or investment techniques. Unless otherwise stated herein, these additional restrictions may be changed with the consent of the Board of Trustees but without approval by or notice to shareholders. The Portfolios Manager, and, in certain cases, individual portfolio managers responsible for making investment decisions for the Portfolios, are referred to in this section and the remainder of this Statement of Additional Information as the Manager. Borrowing Subject to the limitations described under Investment Restrictions below, a Portfolio may be permitted to borrow for temporary purposes and/or for investment purposes. Such a practice will result in leveraging of a Portfolio s assets and may cause a Portfolio to liquidate portfolio positions when it would not be advantageous to do so. This borrowing may be secured or unsecured. Provisions of the 1940 Act require a Portfolio to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the Portfolio s total assets made for temporary administrative purposes. Any borrowings for temporary administrative purposes in excess of 5% of the Portfolio s total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a Portfolio may be required to sell some of its portfolio holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint if the Portfolio sells holdings at that time. Borrowing, like other forms of leverage, will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a Portfolio s portfolio. Money borrowed will be subject to interest costs, which may or may not be recovered by appreciation of the securities purchased, if any. A Portfolio also may be required to maintain minimum average balances in connection 6

7 with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. From time to time, the Trust may enter into and make borrowings for temporary purposes related to the redemption of shares under a credit agreement with third-party lenders. Borrowings made under such a credit agreement will be allocated among the Portfolios pursuant to guidelines approved by the Board of Trustees. The Trust has entered into a credit agreement (the State Street Agreement ), among the Trust, Allianz Funds Multi-Strategy Trust, Allianz Funds and Premier Multi-Series VIT, as borrowers (collectively, the AllianzGI Borrowers and each series thereof, an AllianzGI Borrower Fund ), and State Street Bank and Trust Company, as agent and lender, for a committed line of credit. The State Street Agreement has a 364 day term through October 25, 2018 and permits the AllianzGI Borrowers to borrow up to $200 million in aggregate, subject to (i) a requirement that each AllianzGI Borrower Fund s asset coverage with respect to senior securities representing indebtedness be 300% or higher, and (ii) certain other limitations and conditions. Each AllianzGI Borrower Fund must pay interest on any amounts borrowed under the facility at a rate per annum equal to 1.25% plus the higher of the then-current federal funds overnight rate or the one-month LIBOR rate, subject to upward adjustment when any past due payments are outstanding. The AllianzGI Borrowers must also pay a usage fee at an annualized rate of 0.25% on undrawn amounts, allocated pro rata among the AllianzGI Borrower Funds on the basis of net assets. Amounts borrowed may be repaid and reborrowed on a revolving basis during the term of the facility. In addition to borrowing money, a Portfolio may enter into reverse repurchase agreements, dollar rolls, sale-buybacks and other transactions that can be viewed as forms of borrowings. A reverse repurchase agreement involves the sale of a portfolio-eligible security by a Portfolio to another party, such as a bank or broker-dealer, coupled with its agreement to repurchase the instrument at a specified time and price. Under a reverse repurchase agreement, the Portfolio continues to receive any principal and interest payments on the underlying security during the term of the agreement. Such transactions are advantageous if the interest cost to the Portfolio of the reverse repurchase transaction is less than the returns it obtains on investments purchased with the cash. Dollar rolls are transactions in which a Portfolio sells mortgage-related securities, such as a security issued by the Government National Mortgage Association ( GNMA ), for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type and coupon) securities on a specified future date at a pre-determined price. Unlike in the case of reverse repurchase agreements, the dealer with which a Portfolio enters into a dollar-roll transaction is not obligated to return the same securities as those originally sold by the Portfolio, but only securities that are substantially identical. To be considered substantially identical, the securities returned to a Portfolio generally must: (1) be collateralized by the same types of underlying mortgages; (2) be issued by the same agency and be part of the same program; (3) have a similar original stated maturity; (4) have identical net coupon rates; (5) have similar market yields (and therefore price); and (6) satisfy good delivery requirements, meaning that the aggregate principal amounts of the securities delivered and received back must be within 0.01% of the initial amount delivered. A Portfolio also may effect simultaneous purchase and sale transactions that are known as sale-buybacks. A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty who purchases the security is entitled to receive any principal or interest payments made on the underlying security pending settlement of the Portfolio s repurchase of the underlying security. It is possible that changing government regulation may affect a Portfolio s use of these strategies. In December 2015, the SEC proposed new regulations applicable to a fund s use of instruments including reverse repurchase agreements, short sale borrowings, and any firm or standby commitment agreements or similar agreements. If adopted as proposed, these regulations could significantly limit or impact a Portfolio s ability to invest in such instruments, limit a Portfolio s ability to employ certain strategies that use such instruments and adversely affect a Portfolio s performance, efficiency in implementing its strategy, liquidity and ability to pursue its investment objectives. Also, changes in regulatory requirements concerning margin for certain types of financing transactions, such as repurchase agreements, reverse repurchase agreements, and securities lending and borrowing, could impact a Portfolio s ability to utilize these investment strategies and techniques. A Portfolio will typically segregate or earmark assets determined to be liquid by the Manager in accordance with procedures approved by the Board of Trustees and equal (on a daily mark-to-market basis) to its obligations under reverse repurchase agreements, dollar rolls and sale-buybacks. Reverse repurchase agreements, dollar rolls and sale-buybacks involve leverage risk and the risk that the market value of securities retained by a Portfolio may decline below the repurchase price of the securities that the Portfolio sold and is obligated to repurchase. In the event the buyer of securities under a reverse repurchase agreement, dollar roll or sale-buyback files for bankruptcy or becomes insolvent, a Portfolio s use of the proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Portfolio s obligation to repurchase the securities. Reverse repurchase agreements, dollar rolls and sale-buybacks will be subject to the Portfolios limitations on borrowings as specified under Investment Restrictions below. 7

8 Interfund Lending Pursuant to an exemptive order granted by the SEC (the Order ), the Portfolios are authorized to enter into a master interfund lending agreement (the Interfund Program ) with each other and other certain funds advised by AllianzGI U.S. For purposes of this subsection only, the term Participating Fund includes the Portfolios and any other fund advised by AllianzGI U.S. that is subject to the Order. The Interfund Program allows each Participating Fund, whose policies permit it to do so, to lend money directly to and borrow money directly from other Participating Funds for temporary purposes through the Interfund Program (each an Interfund Loan ). Participating Funds issuing Interfund Loans are referred to below as Borrowing Funds, and Participating Funds acquiring Interfund Loans are referred to below as Lending Funds. All Interfund Loans would consist only of uninvested cash reserves that the Lending Fund otherwise would invest in short-term repurchase agreements or other short-term instruments. Although any future series of money market funds may, to the extent permitted by their investment policies, participate in the Interfund Program, they typically will not need to participate as borrowers because they rarely need to borrow cash to meet redemptions. If a Participating Fund has outstanding bank borrowings, any Interfund Loan to the Participating Fund will: (i) be at an interest rate equal to or lower than the interest rate of any outstanding bank loan; (ii) be secured at least on an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding bank loan that requires collateral; (iii) have a maturity no longer than any outstanding bank loan (and in any event not over seven days); and (iv) provide that, if an event of default occurs under any agreement evidencing an outstanding bank loan to the Participating Fund, that event of default will automatically (without need for action or notice by the Lending Fund) constitute an immediate event of default under the interfund lending agreement, entitling the Lending Fund to call the Interfund Loan (and exercise all rights with respect to any collateral), and that such call will be made if the lending bank exercises its right to call its loan under its agreement with the Borrowing Fund. A Participating Fund may make an unsecured borrowing under the Interfund Program if its outstanding borrowings from all sources immediately after the borrowing under the Interfund Program are equal to or less than 10% of its total assets, provided that if the Participating Fund has a secured loan outstanding from any other lender, including but not limited to another Participating Fund, the Participating Fund s borrowing under the Interfund Program will be secured on at least an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding loan that requires collateral. If a Participating Fund s total outstanding borrowings immediately after borrowing under the Interfund Program exceed 10% of its total assets, the Participating Fund may borrow under the Interfund Program on a secured basis only. A Participating Fund may not borrow under the Interfund Program or from any other source if its total outstanding borrowings immediately after the borrowing would be more than 33 1/3% of its total assets or any lower threshold provided for by a Participating Fund s fundamental restriction or non-fundamental policy. No Participating Fund may lend to another Participating Fund through the Interfund Program if the loan would cause the Lending Fund s aggregate outstanding loans under the Interfund Program to exceed 15% of its current net assets at the time of the loan. A Participating Fund s Interfund Loans to any one Participating Fund shall not exceed 5% of the Lending Fund s net assets. The duration of Interfund Loans will be limited to the time required to receive payment for securities sold, but in no event more than seven days. Loans effected within seven days of each other will be treated as separate loan transactions for purposes of this condition. Each Interfund Loan may be called on one business day s notice by a Lending Fund and may be repaid on any day by a Borrowing Fund. The limitations described above and the other conditions of the Order permitting Interfund Lending are designed to minimize the risks associated with Interfund Lending for both the Lending Fund and the Borrowing Fund. However, no borrowing or lending activity is without risk. When a Participating Fund borrows money from another Participating Fund under the Interfund Program, there is a risk that the Interfund Loan could be called on one day s notice, in which case the Borrowing Fund may have to borrow from a bank at higher rates if an Interfund Loan is not available from another Participating Fund. Interfund Loans are subject to the risk that the Borrowing Fund could be unable to repay the loan when due, and a delay in repayment to a Lending Fund could result in a lost opportunity or additional lending costs. No Participating Fund may borrow more than the amount permitted by its investment restrictions. Preferred Stock Preferred stock represents an equity interest in a company that generally entitles the holder to receive, in preference to the holders of other stocks such as common stocks, dividends and a fixed share of the proceeds resulting from a liquidation of the company. Some preferred stocks also entitle their holders to receive additional liquidation proceeds on the same basis as holders of a company s common stock, and thus also represent an ownership interest in that company. The Portfolios may invest in preferred stocks that pay fixed or adjustable rates of return. Preferred shares are subject to issuer-specific and market risks applicable generally to equity securities. The value of a company s preferred stock may fall as a result of factors relating directly to that company s products or services. A preferred stock s value may also fall because of factors affecting not just the company, but companies in the same industry or in a number of different industries, such as increases in production costs. The value of preferred stock may also be affected by changes in financial markets that are relatively unrelated to the company or its industry, such as changes in interest rates or currency exchange rates. In addition, a company s preferred stock generally pays 8

9 dividends only after the company makes required payments to holders of its bonds and other debt. For this reason, the value of preferred stocks will usually react more strongly than bonds and other debt to actual or perceived changes in the company s financial condition or prospects. Preferred stocks of smaller companies may be more vulnerable to adverse developments than those of larger companies. Fixed Rate Preferred Stocks. Some fixed rate preferred stocks in which a Portfolio may invest, known as perpetual preferred stocks, offer a fixed return with no maturity date. Because they never mature, perpetual preferred stocks act like long-term bonds and can be more volatile than and more sensitive to changes in interest rates than other types of preferred stocks that have a maturity date. The Portfolios may also invest in sinking fund preferred stocks. These preferred stocks also offer a fixed return, but have a maturity date and are retired or redeemed on a predetermined schedule. The shorter duration of sinking fund preferred stocks makes them perform somewhat like intermediate-term bonds and they typically have lower yields than perpetual preferred stocks. Adjustable Rate and Auction Preferred Stocks. Typically, the dividend rate on an adjustable rate preferred stock is determined prospectively each quarter by applying an adjustment formula established at the time of issuance of the stock. Although adjustment formulas vary among issues, they typically involve a fixed premium or discount relative to rates on specified debt securities issued by the U.S. Treasury. Typically, an adjustment formula will provide for a fixed premium or discount adjustment relative to the highest base yield of three specified U.S. Treasury securities: the 90-day Treasury bill, the 10-year Treasury note and the 20-year Treasury bond. The premium or discount adjustment to be added to or subtracted from this highest U.S. Treasury base rate yield is fixed at the time of issue and cannot be changed without the approval of the holders of the stock. The dividend rate on another type of preferred stocks in which a Portfolio may invest, commonly known as auction preferred stocks, is adjusted at intervals that may be more frequent than quarterly, such as every 7 or 49 days, based on bids submitted by holders and prospective purchasers of such stocks and may be subject to stated maximum and minimum dividend rates. The issues of most adjustable rate and auction preferred stocks currently outstanding are perpetual, but are redeemable after a specified date, or upon notice, at the option of the issuer. Certain issues supported by the credit of a high-rated financial institution provide for mandatory redemption prior to expiration of the credit arrangement. No redemption can occur if full cumulative dividends are not paid. Although the dividend rates on adjustable and auction preferred stocks are generally adjusted or reset frequently, the market values of these preferred stocks may still fluctuate in response to changes in interest rates. Market values of adjustable preferred stocks also may substantially fluctuate if interest rates increase or decrease once the maximum or minimum dividend rate for a particular stock is approached. Auctions for U.S. auction preferred stocks have failed since early 2008, and the dividend rates payable on such preferred shares since that time typically have been paid at their maximum applicable rate (typically a function of a reference rate of interest). The Manager expects that auction preferred stocks will continue to pay dividends at their maximum applicable rate for the foreseeable future and cannot predict whether or when the auction markets for auction preferred stocks may resume normal functioning. Securities Loans Subject to certain conditions described in the PPMs and below, each of the Portfolios may make secured loans of its portfolio securities to brokers, dealers and other financial institutions. The risks in lending portfolio securities, as with other extensions of credit, include possible delay in recovery of the securities or possible loss of rights in the collateral should the borrowers (which typically include broker-dealers and other financial services companies) fail financially. However, such loans will be made only to borrowers that are believed by the Manager to be of satisfactory credit standing. Securities loans are made to borrowers pursuant to agreements requiring that loans be continuously secured by collateral consisting of U.S. Government securities, cash or cash equivalents (negotiable certificates of deposit, bankers acceptances or letters of credit) maintained on a daily mark-to-market basis in an amount at least equal at all times to the market value of the securities lent. The borrower pays to the lending Portfolio an amount equal to any dividends or interest received on the securities lent. The Portfolios may invest the cash collateral received or receive a fee from the borrower. In the case of cash collateral, a Portfolio typically pays a rebate to the borrower (in addition to payments to its securities lending agent, as described below). Cash collateral that a Portfolio receives may be invested in overnight time deposits, repurchase agreements, interest-bearing or discounted commercial paper (including U.S. dollar-denominated commercial paper of non-u.s. issuers) and/or other short-term money market instruments (generally with remaining maturities of 397 days or less), either directly through joint accounts along with securities lending cash collateral of other Portfolios or indirectly through investments in affiliated or unaffiliated money market funds. Any investment of cash collateral through such joint accounts is subject to conditions established by the SEC staff. Under the terms of a securities lending agency agreement, the investment of cash collateral is at the sole risk of the Portfolio in most cases. Any income or gains and losses from investing and reinvesting any cash collateral delivered by a borrower pursuant to a loan are at the Portfolio s risk (except as provided below), and to the extent any such losses reduce the amount of cash below the amount required to be returned to the borrower upon the termination of any loan, the Portfolio may be required by the securities lending agent to pay or cause to be paid to such borrower an amount equal to such shortfall in cash. A portion of any income earned through investment of cash collateral and a portion of any fees received from borrowers may be retained by the Portfolios securities lending agent, which currently is an affiliate of the Manager. Notwithstanding the foregoing, to the extent such shortfall is with respect to amounts owed to a borrower as a cash collateral fee, the securities lending agency agreement provides that the securities lending agent and the Portfolio share the difference 9

10 between the income generated on the investment of cash collateral with respect to a loan and the amount to be paid to the borrower as a cash collateral fee. Investments of cash collateral may lose value and/or become illiquid, although each Portfolio remains obligated to return the collateral amount to the borrower upon termination or maturity of the securities loan and may realize losses on the collateral investments and/or be required to liquidate other portfolio assets in order to satisfy its obligations. Due to continuing adverse conditions in the mortgage and credit markets, liquidity and related problems in the broader markets for commercial paper and other factors, any investments of securities lending collateral by the Portfolios, including investments in asset-backed commercial paper and notes issued by structured investment vehicles, would present increased credit and liquidity risks. See Mortgage-Related and Asset-Backed Securities below for more information. To the extent a Portfolio invests collateral in instruments that become illiquid, efforts to recall securities and return collateral may force the Portfolio to liquidate other portfolio holdings in an effort to generate cash. Any securities lending income would be disclosed as such in the Statement of Operations in the Trust s annual report for the applicable fiscal period. The Portfolios may pay reasonable finders, administration and custodial fees in connection with a loan of securities and may share the interest earned on the collateral with the borrower. Each Portfolio may lend portfolio securities up to the maximum percentage set forth in the applicable PPM and under Investment Restrictions Fundamental Investment Restrictions below. Although control over, and voting rights or rights to consent with respect to, the loaned securities pass to the borrower, the Portfolio, as the lender, retains the right to call the loans and obtain the return of the securities loaned at any time on reasonable notice. The Portfolio may call such loans in order to sell the securities involved or, if the holders of the securities are asked to vote upon or consent to matters that the Manager believes materially affect the investment, in order to vote the securities. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, the Portfolio could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. These delays and costs could be greater for non-u.s. securities. When engaged in securities lending, each Portfolio s performance will continue to reflect changes in the value of the securities loaned and will also reflect the receipt of either interest, through investment of cash collateral by the Portfolio in permissible investments, or a fee, if the collateral is U.S. Government securities. The Portfolios do not currently have a program in place pursuant to which they may lend portfolio securities and do not expect to lend portfolio securities to a significant degree, but they may establish such a program in the future. Convertible Securities and Synthetic Convertible Securities Convertible securities are generally bonds, debentures, notes, preferred securities or other securities or investments that may be converted or exchanged (by the holder or by the issuer) into shares of common stock or other equity securities (or cash or securities of equivalent value) of the same or a different issuer at a stated exchange ratio or predetermined price (the conversion price ). A convertible security is designed to provide current income and also the potential for capital appreciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock. A convertible security may be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by a Portfolio is called for redemption or conversion, the Portfolio could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party, which may have an adverse effect on the Portfolio s ability to achieve its investment objectives. Convertible securities have general characteristics similar to both debt and equity securities. A convertible security generally entitles the holder to receive interest paid or accrued until the convertible security matures or is redeemed, converted or exchanged. Convertible securities rank senior to common stock in a corporation s capital structure and, therefore, generally entail less risk than the corporation s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a debt obligation. Before conversion, convertible securities have characteristics similar to non-convertible debt obligations and are designed to provide for a stable stream of income with generally higher yields than common stocks. However, there can be no assurance of current income because the issuers of the convertible securities may default on their obligations. Convertible securities are subordinate in rank to any senior debt obligations of the issuer, and, therefore, an issuer s convertible securities entail more risk than its debt obligations. Moreover, convertible securities are often rated below investment grade or not rated because they fall below debt obligations and just above common equity in order of preference or priority on an issuer s balance sheet. The Portfolios may invest in contingent convertible securities ( CoCos ), which generally either convert into equity or have their principal written down upon the occurrence of certain pre-specified triggering events, which may linked to the issuer s stock price, regulatory capital thresholds, regulatory actions relating to the issuer s continued viability, or other pre-specified events. As a result, 10

11 an investment by a Portfolio in CoCos is subject to the risk that coupon (i.e., interest) payments may be canceled by the issuer or a regulatory authority in order to help the issuer absorb losses. An investment by a Portfolio in CoCos is also subject to the risk that, in the event of the liquidation, dissolution or winding-up of an issuer prior to a trigger event, the Portfolio s rights and claims will generally rank junior to the claims of holders of the issuer s other debt obligations. In addition, if CoCos held by a Portfolio are converted into the issuer s underlying equity securities following a trigger event, the Portfolio s holding may be further subordinated due to the conversion from a debt to equity instrument. Further, the value of an investment in CoCos is unpredictable and will be influenced by many factors and risks, including interest rate risk, credit risk, market risk and liquidity risk. An investment by a Portfolio in CoCos may result in losses to the Portfolio. Convertible securities generally offer lower interest or dividend yields than non-convertible debt securities of similar credit quality because of the potential for capital appreciation. The common stock underlying convertible securities may be issued by a different entity than the issuer of the convertible securities. The value of convertible securities is influenced by both the yield of non-convertible securities of comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (i.e., strictly on the basis of its yield) is sometimes referred to as its investment value. The investment value of the convertible security typically will fluctuate based on the credit quality of the issuer and will fluctuate inversely with changes in prevailing interest rates. However, at the same time, the convertible security will be influenced by its conversion value, which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the underlying common stock, and will therefore be subject to risks relating to the activities of the issuer and/or general market and economic conditions. Depending upon the relationship of the conversion price to the market value of the underlying security, a convertible security may trade more like an equity security than a debt instrument. If, because of a low price of the common stock, the conversion value is substantially below the investment value of the convertible security, the price of the convertible security is governed principally by its investment value. Generally, if the conversion value of a convertible security increases to a point that approximates or exceeds its investment value, the value of the security will be principally influenced by its conversion value. A convertible security will sell at a premium over its conversion value to the extent investors place value on the right to acquire the underlying common stock while holding an income-producing security. To the extent consistent with its other investment policies, each Portfolio may also create a synthetic convertible security by combining separate securities that possess the two principal characteristics of a traditional convertible security, i.e., an incomeproducing security ( income-producing element ) and the right to acquire an equity security ( convertible element ). The incomeproducing element is achieved by investing in non-convertible, income-producing securities such as bonds, preferred securities and money market instruments. The convertible element is achieved by investing in warrants or options to buy common stock at a certain exercise price, or options on a stock index. Unlike a traditional convertible security, which is a single security having a unitary market value, a synthetic convertible comprises two or more separate securities, each with its own market value. Therefore, the market value of a synthetic convertible security is the sum of the values of its income-producing element and its convertible element. For this reason, the values of a synthetic convertible security and a traditional convertible security may respond differently to market fluctuations. More flexibility is possible in the assembly of a synthetic convertible security than in the purchase of a convertible security. Although synthetic convertible securities may be selected where the two elements are issued by a single issuer, thus making the synthetic convertible security similar to the traditional convertible security, the character of a synthetic convertible security allows the combination of components representing distinct issuers, when the Manager believes that such a combination may better achieve a Portfolio s investment objective. A synthetic convertible security also is a more flexible investment in that its two components may be purchased separately. For example, a Portfolio may purchase a warrant for inclusion in a synthetic convertible security but temporarily hold short-term investments while postponing the purchase of a corresponding bond pending development of more favorable market conditions. A holder of a synthetic convertible security faces the risk of a decline in the price of the security or the level of the index or security involved in the convertible element, causing a decline in the value of the call option or warrant purchased to create the synthetic convertible security. Should the price of the stock fall below the exercise price and remain there throughout the exercise period, the entire amount paid for the call option or warrant would be lost. Because a synthetic convertible security includes the incomeproducing element as well, the holder of a synthetic convertible security also faces the risk that interest rates will rise, causing a decline in the value of the income-producing element. The Portfolios may also purchase synthetic convertible securities created by other parties, including convertible structured notes. Convertible structured notes are income-producing debentures linked to equity, and are typically issued by investment banks. Convertible structured notes have the attributes of a convertible security; however, the investment bank that issued the convertible 11

12 note, rather than the issuer of the underlying common stock into which the note is convertible, assumes the credit risk associated with the underlying investment and a Portfolio in turn assumes credit risk associated with the convertible note. Non-U.S. Securities The Portfolios may invest in non-u.s. securities. Non-U.S. securities may include, but are not limited to, securities of companies that are organized and headquartered outside the U.S. (including securities traded in local currencies); non-u.s. equity securities as designated by commonly-recognized market data services; U.S. dollar- or non-u.s. currency-denominated corporate debt securities of non-u.s. issuers; securities of U.S. issuers traded principally in non-u.s. markets; non-u.s. bank obligations; U.S. dollar- or non-u.s. currency-denominated obligations of non-u.s. governments or their subdivisions, agencies and instrumentalities, international agencies and supranational entities; and securities of other investment companies investing primarily in non-u.s. securities. When assessing compliance with investment policies that designate a minimum or maximum level of investment in non-u.s. securities for the Portfolio, the Manager may apply a variety of factors (either in addition to or in lieu of one or more of the categories described in the preceding sentence) in order to determine whether a particular security or instrument should be treated as U.S. or non-u.s. Some non-u.s. securities may be restricted against transfer within the United States or to a United States person. For more information about how the Manager may define non-u.s. securities for purposes of the Portfolio s asset tests and investment restrictions (if appropriate for the Portfolio), see the Portfolio s principal investments and strategies under Principal Investments and Strategies of the Portfolio in each PPM. The non-u.s. securities in which a Portfolio may invest include Eurodollar obligations and Yankee Dollar obligations. Eurodollar obligations are U.S. dollar-denominated certificates of deposit and time deposits issued outside the U.S. capital markets by non-u.s. branches of U.S. banks and by non-u.s. banks. Yankee Dollar obligations are U.S. dollar-denominated obligations issued in the U.S. capital markets by non-u.s. banks. Eurodollar and Yankee Dollar obligations are generally subject to the same risks that apply to domestic debt issues, notably credit risk, market risk and liquidity risk. Additionally, Eurodollar (and to a limited extent, Yankee Dollar) obligations are subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of U.S. dollars, from flowing across its borders. Other risks include adverse political and economic developments; the extent and quality of government regulation of financial markets and institutions; the imposition of non-u.s. taxes, including withholding taxes; and the expropriation or nationalization of non-u.s. issuers. The Portfolios may invest in American Depositary Receipts ( ADRs ), European Depositary Receipts ( EDRs ) or Global Depositary Receipts ( GDRs ). ADRs are U.S. dollar-denominated receipts issued generally by domestic banks and represent the deposit with the bank of a security of a non-u.s. issuer. EDRs are foreign currency-denominated receipts similar to ADRs and are issued and traded in Europe, and are publicly traded on exchanges or over-the-counter ( OTC ) in the United States. GDRs may be offered privately in the United States and also trade in public or private markets in other countries. ADRs, EDRs and GDRs may be issued as sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs, EDRs or GDRs. In unsponsored programs, the issuer may not be directly involved in the creation of the ADRs, EDRs or GDRs. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that has participated in the creation of a sponsored program. For this reason, there may be an increased possibility that the Portfolios would not become aware of and be able to respond in a timely manner to corporate actions such as stock splits or rights offerings involving the foreign issuer of the security underlying an ADR. While readily exchangeable with stock in local markets, the depositary receipts in an unsponsored program may be less liquid than those in a sponsored program. The Portfolios may invest in Brady Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the Brady Plan ). Brady Plan debt restructurings have been implemented in a number of countries, including: Albania, Argentina, Bolivia, Brazil, Bulgaria, Columbia, Costa Rica, the Dominican Republic, Ecuador, Ivory Coast, Jordan, Mexico, Morocco, Niger, Nigeria, Panama, Peru, the Philippines, Poland, Uruguay, Venezuela and Vietnam. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the OTC secondary market. Brady Bonds are not considered to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year s interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to value recovery payments in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized 12

13 repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (the uncollateralized amounts constitute the residual risk ). Most Mexican Brady Bonds issued to date have principal repayments at final maturity fully collateralized by U.S. Treasury zerocoupon bonds (or comparable collateral denominated in other currencies) and interest coupon payments collateralized on an 18-month rolling-forward basis by funds held in escrow by an agent for the bondholders. A significant portion of the Venezuelan Brady Bonds and the Argentine Brady Bonds issued to date have repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and/or interest coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for Argentina) rolling-forward basis by securities held by the Federal Reserve Bank of New York as collateral agent. Brady Bonds involve various risk factors including residual risk and the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds. There can be no assurance that Brady Bonds in which the Portfolios may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the Portfolios to suffer a loss of interest or principal on any of its holdings. Investing in non-u.s. securities involves special risks and considerations not typically associated with investing in U.S. securities. These include: differences in accounting, auditing and financial reporting standards, generally higher commission rates on non-u.s. portfolio transactions, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations (which may include suspension of the ability to transfer currency from a country), market disruption, the possibility of security suspensions, political instability that affects U.S. investments in non-u.s. countries and potential restrictions on the flow of international capital. In addition, non-u.s. securities and income derived from those securities may be subject to non-u.s. taxes, including withholding taxes, which will reduce investment returns. See Taxation. Non-U.S. securities often trade with less frequency and volume than domestic securities and therefore may exhibit greater price volatility. Changes in foreign exchange rates will affect the value of those securities that are denominated or quoted in currencies other than the U.S. dollar. The currencies of non- U.S. countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by a Portfolio. Member States of the European Union recently put in place new laws and regulations to implement the second Markets in Financial Instruments Directive ( MiFID II ) and the related Markets in Financial Instruments Regulation ( MiFIR ). These impose new regulatory obligations and costs, among other things with respect to the processes and conditions under which global asset managers such as Allianz Global Investors acquire investment research. Notably, investment managers subject to MiFID II may not receive investment research from brokers unless the investment manager pays for such research directly from its own resources, or from a separate, dedicated account paid for with client funds with client permission (or a combination of these methods). Although the Manager and the Trust are both organized in the U.S., they may be affected by MiFID II in several potential scenarios, including, without limitation, where: the Manager seeks to aggregate trades on behalf of the Trust with those of vehicles that are directly subject to MiFID II; the Manager seeks to use brokers based in the European Union; and/or the Manager or the Trust make use of advisory personnel who are subject to European Union regulation. A Portfolio s investments in foreign currency-denominated debt obligations and hedging activities will likely produce a difference between its book income and its taxable income. This difference could cause a portion of the Portfolio s income distributions to constitute returns of capital for tax purposes or require the Portfolio to make distributions exceeding book income to qualify for treatment as a regulated investment company for U.S. federal tax purposes. A Portfolio s use of non-u.s. securities may increase or accelerate the amount of ordinary income recognized by shareholders. See Taxation. Investment in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of the debt. A governmental entity s willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity s policy toward the International Monetary Fund, and the political constraints to which a governmental entity may be subject. Governmental entities may also depend on expected disbursements from foreign governments, multilateral agencies and others to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entity s implementation of economic reforms and/or economic performance and the timely service of such debtor s obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties commitments to lend funds to the governmental entity, which may further impair such debtor s ability or willingness to service its debts in a timely manner. Consequently, governmental entities may default on their sovereign debt. Holders of sovereign debt may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. There is no bankruptcy proceeding by which sovereign debt on which governmental entities have defaulted may be collected in whole or in part. 13